EVALUATING THE OPPORTUNITIES AND ECONOMIC VIABILITY FOR

DEVELOPING NIGERIAN MARGINAL FIELDS (A CASE STUDY OF AMOJI

FIELD)

BY
Madaki Aliyu Muhammad
11/26503/u/2

A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUREMENT FOR THE

AWARD OF BACHELOR OF ENGINEERING DEGREE ([Link]) IN PETROLEUM

ENGIEERING

TO THE PETROLEUM ENGINEERING PROGRAMME

SCHOOL OF ENGINEERING AND ENGINEERING TECHNOLOGY

ABUBAKAR TAFAWA BALEWA UNIVERSITY, BAUCHI.

JANUARY, 2017.

i
 CERTIFICATION
I hereby declare that this project was written by me and is a record of my own research work. It

has not been presented before in any previous application for the award of [Link]. degree.

Reference made from published literature have been duly acknowledge.

Madaki Aliyu Muhammad _________________ ______________

11/26503/u/2 Signature Date

ii
 APPROVAL PAGE

This project has been read approved and found to fulfil the requirement for the award of

Bachelor of Engineering degree (B. Eng.) honor in petroleum in petroleum Engineering

programme, school of Engineering and engineering technology, Abubakar Tafawa Balewa

University, Bauchi.

Engr. Hamza Ismail

_________________ ________________ ______________
Supervisor signature date

Dr. M.B Adamu

__________________ _________________ _____________
Coordinator, Petroleum signature date
Engineering Programme

Prof. Olaleka Adisa Olafuyi

________________ ______________ _______________
External Examiner Signature Date

iii
 ACKNOWLEDGEMENT

My special gratitude goes to almighty Allah for given me life, health and strength to complete

my undergraduate studies and research project successfully. I also want to appreciate the effort

of my father Mr. Muhammad Madaki and my late Mom Mrs. Hauwa Muhammad and my step

mother Mrs. Hannatu Muhammad for the awesome love, care, support and encouragement they

have given me throughout my studies, may almighty Allah bless you with the best of reward.

I am so much indebted to acknowledge the support, guidance and constructive criticism by my

Supervisor Engr. Hamza Ismail throughout this research work. May Allah increase you in

knowledge, experience and protection. I will also want to thank all the lecturers in petroleum

engineering department for the knowledge they impacted in me, may the almighty bless you all.

My profound gratitude goes to my uncle Mr. Yusheu Adamu who supported me both morally

and financially, may the almighty Allah continue to bless you and your family.

Also to my friend Mustapha Umar Abba, there’s no words that can express your generosity and

kindness to me. I only pray for your future to be bright and remain bless.

Finally, I will like to appreciate the effort of Alhaji Yakubu Muhammad Shafa for helping me to

secure I.T placement in Kaduna refining and petrochemical company limited. May Allah bless

you and your family. And also to all other family, friends, relatives and other peoples that help in

one way or the other to the success of my study and this research work, may Almighty Allah

bless you all.

iv
 DEDICATION

This research work is dedicated to almighty Allah for giving me the grace wisdom and

understanding to complete the work, and to my parent Mr. Muhammad Madaki and Mrs.

Hauwau Muhammad.

v
 ABSTRACT

Marginal oil and gas field could contribute immensely to wealth creation, employment

generation and confidence in local oil firms if properly exploited by the indigenous firms.

Despite the laudable marginal field initiative by the Government, indigenous players still face

challenges in exploiting these fields in Nigeria. This research evaluated the economic viability

for developing one of the Nigerian marginal fields located in Delta state. Impact of Fiscal

regimes and the economic factors that could be hindering oil field development among the

indigenous oil firms were thoroughly studied. Analysis was done both using deterministic and

probabilistic approach based on four major appraisal tools (NPV, IRR, PBP & PI).

Result for deterministic evaluation gave NPV($48.3mm), PI (3.09), PBP(4.44yrs). While for

probabilistic evaluation Palisade software was used and the result are NPV (Worse

scenario=$30.1mm, Best scenario=$67.3mm, most likely event=$48.3mm), PI (Worse scenario

=-14.5, Best scenario= 18.3, most likely event= 1.944), IRR (Worse scenario= -11.66%, Best

scenario= 7.37%, most likely event= -1.35%).

The parameters with the highest impact on the project were determined to be oil price, and

Average annual operating expenses. Profitability index, and Net present value favor development

of the field with 90% confidence level of high project net worth. It was then concluded that

developing Amoji field is indeed profitable with a payout period of four and half years.

However, the IRR was low showing that there’s still risk in the project.

vi
 Contents
Title Page……………………………….………………………………………………………………………………………………………………. I

Certification.................................................................................................................................................Ii
Approval Page.............................................................................................................................................Iii
Acknowledgement......................................................................................................................................Iv
Dedication...................................................................................................................................................V
Abstract......................................................................................................................................................Vi
Table of Content…………………………………………………………………………………………………………………………………….vii

Table of figures……………………………………………………………………………………………………………………………………..Ix

List of tables……………………………………………………………………………………………………………………………………………X

CHAPTER ONE...................................................................................................................................1
1.0 Introduction.....................................................................................................................................1
1.1 Economic Limits.............................................................................................................................2
1.2 Background Of The Study.............................................................................................................2
1.3 Statement Of The Problem............................................................................................................3
1.4 Aim And Objectives........................................................................................................................3
1.5 Significance Of The Study...............................................................................................................3
1.6 Reseach Questions.........................................................................................................................4
1.8 Case Study......................................................................................................................................4
1.7 Brief Description Of Palisade Software..........................................................................................4
1.9 Scope Of The Study........................................................................................................................5

CHAPTER TWO..................................................................................................................................6
2.0 LITERATURE REVIEW..........................................................................................................................6
2.1 Review Of Relevant Literatures.....................................................................................................6
2.2 Marginal Field Program In Nigeria...............................................................................................11
2.3 Basic Economic Concepts.................................................................................................................14
2.3.1 Net Present Value.....................................................................................................................14
2.3.2 Internal Rate Of Return.............................................................................................................15
2.3.3 Profitability Index......................................................................................................................15
2.3.4 Payback Period.........................................................................................................................15
2.4 Risk And Uncertainty.......................................................................................................................16

vii
 2.4.1 Monte Carlo Simulation............................................................................................................17
2.4.2 Sensitivity Analysis....................................................................................................................19
2.5 Literature Gap..................................................................................................................................20

CHAPTER THREE.............................................................................................................................21
3.0 METHODOLOGY...................................................................................................................................21
3.1 Introduction.................................................................................................................................21
3.2 Cash Flow Modelling..................................................................................................................22
3.2.1 Production Profile.....................................................................................................................22
3.2.2 Cash Flow Analysis....................................................................................................................23
3.2.3 Gross Revenue........................................................................................................................23
3.2.4 Royalty...................................................................................................................................24
3.2.5 Costs (Capex And Opex)........................................................................................................25
3.2.6 Cost Recovery.........................................................................................................................26
3.2.7 Profit Oil....................................................................................................................................27
3.2.7 Taxes.........................................................................................................................................28
3.3 Monte Carlo Simulation...................................................................................................................29
3.3.1 Defining Input To The Software................................................................................................30
3.3.2 Defining The Output.................................................................................................................30
3.3.3 Running The Simulation............................................................................................................31

CHAPTER FOUR..............................................................................................................................32
4.0 RESULTS AND DISCUSSION..............................................................................................................32
4.1 Introduction.................................................................................................................................32
4.2 Model Outputs.............................................................................................................................32
4.3 Probablistic Evaluation................................................................................................................34
4.4 Sensitivity Analysis Of Model Outputs.........................................................................................36
4.5 Discussion Of Result.....................................................................................................................39

CHAPTER FIVE..................................................................................................................................41
5.0 CONCLUSION AND RECOMMENDATION..........................................................................................41
5.1 Conclusion...................................................................................................................................41
5.2 Recommendations.....................................................................................................................42

REFERENCES.....................................................................................................................................44

viii
 Table of figures

Fig 3. 1 :Various sections in the Methodology...........................................................................................21

Fig 3. 2 : Major components of Production Sharing contract....................................................................23

Fig 3. 3: Defining input...............................................................................................................................30

Fig 3. 4:Defining output.............................................................................................................................30

Fig 4. 1: Developed model of Amoji field 33

Fig 4. 2 : Probability chart for NPV.............................................................................................................35

Fig. 4. 3 : Probability chart for profitability index......................................................................................35

Fig. 4. 4 : Probability chart for IRR............................................................................................................36

Fig. 4. 5 : Tornado chart for IRR................................................................................................................37

Fig 4. 6 : Spider chart for NPV....................................................................................................................38

Fig 4. 8:Tornado chart for payback period.................................................................................................39

Fig 4. 9 : Spider chart for payback period..................................................................................................39

ix
 LIST OF TABLES

Table 3.1:Sliding scale royalty rate to state (Awotiku, 2011).....................................................................24

Table 3.2:Capex breakdown for onshore marginal field............................................................................25

Table 3.3 : Profit Sharing Based on Recovery

factor…………………………………………………………………..28

x
 CHAPTER ONE
1.0 INTRODUCTION

Nowadays, economics control any of decision making and future projection. For the last two

decades, energy supply has suffered from a series of oil crises. This makes reservoir and

production engineers directing their attention to study the economic performance of oil fields.

This was and still accompanied by the need to update reserves and develop producing fields at a

fair investment and good revenues. This project will investigate the economic viability for the

development of Amoji field in Niger Delta area of Nigeria.

Amoji, is one of the marginal oil and gas fields located in Delta State Nigeria. The federal

government of Nigeria(FGN) commenced the marginal field program to promote in-country

crude oil production and also support the growth of indigenous oil companies. This program

encourages indigenous oil companies to acquire, operate and produce oil fields, which the

international oil companies(IOCs) operating in the country had abandoned because such fields

were deemed to be not economically viable due to high overhead cost. A producer normally

regards oil and gas fields as being marginal on two grounds (both subjective);

Economic: where the revenue generated from a field is (in the producer’s opinion) insufficient

to justify continued or further investigation in that field, whether in its own right or in

comparison to other fields which the producer has interests in as part of a wider production

portfolio.

Strategic: where the field no longer fits into the producer's strategic aspirations; it may be that

the field is performing adequately in economic terms, but the producer wishes to divest its

interests because the field does not fit with the producer's commercial strategy (for example in

1
the light of the decision of a producer to discontinue operations within a particular country or

region)".

While, (DPR) define a marginal field as any field located in Niger Delta region containing oil

and gas reserves which have remained unproduced for over ten years and are booked and

reported annually to DPR. Also DPR defines marginal field as Field with one or more wells

which have not been developed by the operating companies as a consequence of the company's

ranking including unappraised discoveries and undiscovered fields, but excluding fields with

high gas and low oil reserves. (Pedersen, et al. 2006).

1.1 ECONOMIC LIMITS

Economic limit is defined as the minimum average daily-oil-production rate needed to break

even on a before - and/ or after -income-tax basis. Economic limits are used to determine when a

particular activity or part of the field should be shut down. This occurs when pretax operating

cash flow for the item is zero. The economic limit of a portion of a field should consider

incremental avoidable costs, or how much would be saved if the activities of interest were

eliminated.

1.2 BACKGROUND OF THE STUDY

Marginal oil and gas field could contribute immensely to wealth creation, employment

generation and confidence in local oil firms if properly exploited by the indigenous firms.

Despite the laudable marginal field initiative by the Government, indigenous players still face

challenges in exploiting these fields in Nigeria. This research will evaluate the fiscal regime and

the economic factors that could be hindering oil field development among the indigenous oil

firms.

2
1.3 STATEMENT OF THE PROBLEM

Financing the development of marginal fields in Nigeria has been a major challenge for the

indigenous marginal field operators. In 2011, due to high interest rates, only one of the MFOs

(Britannia U) launched Operations using a bank loan. Additionally, with the exception of Niger

Delta Petroleum Resources whose parent company (Niger Delta Exploration and Production) is

listed on Nigerian stock exchange (NSE), none of the MFOs have access to the NSE. The most

recent challenge that add more threat to MFOs is global decline in oil price, which will surely

have effect in their investment.

1.4 AIM AND OBJECTIVES

The main aim of this research is to evaluate the economic viability for the development of Amoji

field in Niger Delta area of Nigeria. The objectives are:

 To critically, evaluate the opportunities and the impact of uncertainties through single

point sensitivity analysis.

 To examine the economic viability of developing the Nigerian marginal fields.

 To estimate the profitability of developing Amoji field in Delta state.

1.5 SIGNIFICANCE OF THE STUDY

3
This project will evaluate the risk associated with marginal oil field development in Nigeria

laying more emphases to Crude Oil Price, Production rate, Capex, Opex, Reserve size and

royalty rate .

1.6 RESEACH QUESTIONS

 To what extent do uncertainties affect marginal field development in Nigeria?

 Is it economically viable to develop Nigerian Marginal fields?

 What is the probability of developing Amoji field in Delta state?

1.8 CASE STUDY

In this research, economic evaluation for the development Nigerian marginal fields will be

conducted, with Amoji field as the based case. It is an onshore oil and gas field located in Delta

State that has 18.5 million barrels of recoverable oil reserve. The field was awarded to Chorus

Energy during the twenty-four marginal field program of the federal government of Nigeria in

the year 2003.

1.7 BRIEF DESCRIPTION OF PALISADE SOFTWARE

Palisade was used for sensitivity analysis in this research. The software was developed to

perform risk analysis using Monte Carlo simulation, to show many possible outcomes in

spreadsheet model and to tell the likelihood of their occurrence. Monte carlo simulation has been

widely used in the petroleum industry for various purposes. As early as 1969, it was used for

pressure transient analysis (Baldwin, 1969). The Monte Carlo method has been used for various

4
other purposes in the industry such as material balance analysis (Murtha, 1987), work-over risk

assessment (Wiggins and Zhang, 1993), reserves estimation (Huffman and Thompson, 1994),

and producing property estimation (Gilman et al, 1998). It is an alternative to both deterministic

estimation and the scenario approach that presents pessimistic, most likely, and optimistic case

scenarios ((Murtha, 1997).

It mathematically and objectively computes and tracks many different future scenarios, and tell

the probabilities and risks associated with each different one. In essence, it allows one to judge

which risk to take and which one to avoid, allowing for the best decision making under

uncertainty. The software has five major operations; Cash flow Modelling, Simulation,

Optimization, Time series analysis and Project risk analysis.

1.9 SCOPE OF THE STUDY

The economic analysis in this research is limited to probabilistic and deterministic approach.

5
 CHAPTER TWO
2.0 LITERATURE REVIEW

2.1 REVIEW OF RELEVANT LITERATURES

When companies intend to develop a project with project finance, it is important to analyze

economic, financial, technical and fiscal variables to ascertain the feasibility of the project (Gatti,

2013). However, to enable better understanding of the economic and financial valuations of field

development projects, several authors recommend different criteria, which they consider to be

the best.

According to (Kasriel, 2013), NPV is the principal basis for investment decisions for upstream

petroleum projects because it is one of the most commonly used valuation methods. Due to the

inherently subjective nature of valuation, other investment metrics are often used with NPV. In

addition, they state that NPV calculation at 10 % discount rate is common practice in the

petroleum industry. Discounted Profit per Barrel (DPB) and Profitability Index (PI) have been

compared to identify a single and comprehensive economic valuation criterion for oil

development projects. While DPB measures NPV per-unit-of-product, PI measures NPV per-

unit-of-investment.

6
(Seba, 1987) suggests that, assuming there are no (real) options to delay a project and the

appropriate cost of capital is used when capital is in short supply, PI will always properly screen

and rank investment opportunities. Seba also argues that, because PI doubles as a measure of the

time-distribution and magnitude of return, PI is therefore a better evaluation criterion than DPB.

However, (Randall L.B., 1987) empirically shows that, although DPB is directly proportional to

PI, using DPB at lower discount rates prevents duplication of an economic analysis that already

uses Return on Investment (ROI). He then argues that for most oil companies, capital is not the

resource in limited supply, but number of quality reserves. Hence, a measure that focuses on the

unit of reserves (barrels) is better than one that focuses on the unit of investments.

(Pedersen, F.B.,Hassan T.H.,&Ashen T.I, 2006) discusses how the recommendations of

quantitative models could sometimes be set aside due to some issues not captured in quantitative

models. Apart from NPV, other factors such as strategic importance, company portfolio effect of

developing the oil reserve, and the company’s risk appetite can impact the actual decision

making process. Pedersen, et al. also emphasizes that raising discount rate to reflect a risk-

avoiding attitude fails especially when analyzing tail end producing fields, which typically have

early income and late abandonment costs. This is because, increasing the discount rate makes tail

end producing fields seem more favorable than they actually.

Similarly, (Pablo 2011) points out that building in risk protecting in an investment by inflating

Weighted Average Cost of Capital (WACC) is a common mistake. WACC, defined as the

weighted average of the cost of debt and the required return on equity cost of equity, can be used

as a discount rate (Pablo, 2011). According to him, since cash flows, and not WACC, are usually

at risk, it will only be sensible to carry out sensitivity analysis on WACC if it is at risk (for

instance with volatile debt interest rates). After an oil development project has been

7
quantitatively and qualitatively evaluated and deemed feasible, the project sponsors may decide

to finance the project with loans. From a banker’s viewpoint, project finance is used when the

loan for a particular project under development is repaid using project cash flows as security for

the lenders.

Ayodele & Frimpong (2003) perform economic analysis of Nigerian marginal fields in which

they consider cash flow modelling, profitability analysis, sensitivity analysis as well as risk

modelling using generally accepted technical, economic and financial data from the Nigerian

petroleum industry. They narrate that multinationals, as well as smaller oil companies, generally

use the Discounted Cash Flow (DCF) method when carrying out economic valuations. However,

contrary to the 10% discount rate suggested by Kasriel & Wood (2013), they state that the range

of 17% to 18% is the normally accepted discount rate in Nigeria and asserts that the DCF method

is befitting for the purpose of analyzing marginal field economics because it is a common

method. Using a spreadsheet, they model an oilfield with recoverable reserves of 35 million

barrels (mmbbls) and shows that by utilizing ‘reasonable’ production assumptions obtainable in

the Niger Delta, a US$50 million marginal field development investment in 2003 has an NPV of

about US$6.6 million, IRR of about 21%, and PI of 1.125.

Ayodele & Frimpong (2003) highlights that financing is the major challenge affecting marginal

field development because foreign exchange is needed for procuring oil equipment and services.

And therefore recommends that raising finance through the NSE can be a great solution.

Kue & Orodu (2006) evaluates the profitability of 4 possible project development concepts for

an offshore reserve containing 45 mmbbls of recoverable crude oil. One of the development

options involves using subsea completions system possibly tied back to a converted Floating

Production Storage and Offloading (FPSO) vessel. Other options include using a production

8
system consisting of a jack-up rig with subsea storage; using a Floating Storage Unit (FSU)

system that has a light and reusable platform, and using an FSU system together with a converted

semi-submersible rig.

For small and marginally economic reserves holding between 3 to 100 million recoverable

barrels of oil, even though a non-conventional development approach would drive down costs,

the process of choosing which approach to use should be based on detailed economic analysis.

Kue & Orodu (2006) ranks the different projects using PI, IRR, Growth Rate of Return (GROR)

and payback period. For the base case, they model a hypothetical offshore oil field, located in

about 100 meters of water, isolated from any neighboring reserves, facilities and infrastructure,

and producing 60,000 bpd with exponential production decline rate. Their base case spreadsheet

model pegs oil price at US$60 per barrel, discount rate at 20% and straight-line depreciation of

20% per annum. Kue & Orodu (2006) narrates that field development cost could be

approximated by the sum of drilling and production facility costs since they constitute a

substantial percentage of the cost to produce from a field. They show that the option of using a

jack-up production platform, together with concrete subsea storage, was the best option with

NPV of US$26 million and IRR of 26%. Of all the different economic performance indicators,

NPV and IRR proved to be both easy and clear quantitative measures for screening and ranking

the option. Since each parameter has a range of uncertainty around the base case which

represents the most probable outcome, sensitivity analysis can be used to determine the effects of

change in the parameters on the base case NPV.

The sensitivity analysis carried out by Kue & Orodu (2006), using a spreadsheet-based model,

indicates that NPV is most sensitive to changes in reserve size and oil price. To understand

uncertainty in a model, either the deterministic approach of varying key input parameters to

9
appreciate their impact on NPV or a stochastic approach that uses Monte Carlo simulation

method can be used.

Adamu, et al. (2013) also studies the economic viability of offshore marginal fields in Nigeria.

They focus on detecting the most important variables impacting project economics and decision

making. The economic viability yardsticks in their model include NPV, IRR, PI, payback period,

Present Value Ratio (PVR) and an undiscounted cumulative profit to investment ratio. Their

based case model is for a field located in 88 feet of water and 15 miles offshore the Niger Delta

with recoverable reserves of 77.4 mmbbls, producing for 10 years, with initial production rate of

5,000 bpd and exponential field production decline rate of 7%. Other assumptions include a 15%

minimum rate of return, inflation rate of 7%, tax rate of 50%, royalty rate of 18.5%, depreciation

of 20% per year lasting for 5 years, Education Tax Fund (ETF) rate of 25% and Niger Delta

Development Commission (NDDC) tax rate of 3%.Oil price was pegged at US$60 per barrel,

Gas price at US$3 per million standard cubic feet (MSCF), Capital Expenditure (Capex) at

US$380 million, and Operating Expenditure (Opex) at US$38 million (year 1) and US$47

million (year 10). they explain that the choice of a 15% discount rate is because the World Bank

identifies it as the hurdle rate for investments in oil and gas in Nigeria. The result of the Adamu,

et al. (2013) spreadsheet-based DCF analysis shows NPV of US$539 million with IRR of 61%,

PI of 2.42 and PVR of 1.42. The undiscounted profit-to-investment ratio was 3.76 and the

investment was shown to payback in a year and a half. From results of sensitivity analysis using

tornado diagrams and spider charts, they show that changes in oil price and tax rate has the most

impact on on IRR, Payback period and NPV. Adamu, et al. (2013) however comments that a

model that only uses a deterministic approach could be limited in capturing the sheer impact of

the multiple interdependence between the variables in an economic model. Also uses a stochastic

10
approach. The approach uses a simulation software tool to carry out Monte Carlo simulation.

Most of the variables are defined using triangular distribution, and the simulation samples 10,000

iterations. Their simulation shows that the probability of having NPV between zero (break-even

point) and the maximum value of US$627 million was 90%. And therefore concludes that the

development of offshore marginal fields in Nigeria is economically viable.

Akinpelu & Omole (2009) models and analyses a marginal field. Their Studies involve a

cautious strategy of gradually phasing development investments which cost US$52 million and

an aggressive strategy that favours substantial upfront development investments which cost

US$82 million. The aggressive strategy has four categories depending on production method and

type of development wells (horizontal/vertical) drilled. And assumes initial production rate of

2,000 bpd and 4,000 bpd for vertical and horizontal wells respectively. Due to difficulty with

ranking the options when they use NPV, also uses PI which gives clear differentiations. The

result of the sensitivity analysis, using a tornado diagram, shows that although total well cost has

less impact than production variables (intial production and decline rate), NPV was most

sensitive to changes in total well cost and production variables. Their probabilistic model simply

utilizes triangular distributions for the inputs and show that the probability of having a negative

NPV is zero. Based on the Akinpelu & Omole (2009) analysis, an aggressive development

strategy is shown to be the preferred strategy.

2.2 MARGINAL FIELD PROGRAM IN NIGERIA

Marginal Fields development is an offshoot of Federal Government policy to kick-off indigenous

participation in the upstream sector of the petroleum industry. The government sought to achieve

this objective by ensuring the farm out of marginal fields within the concessions of the major

11
multinational oil operators to the indigenous operators. The principal legislation of the Nigerian

Petroleum Industry is the Petroleum Act 1969 Laws of The Federation of Nigeria (The Act)

which vests ownership and control of all petroleum to the Federal Government. The Act provides

for the grant of three types of interest in oil blocks by the Minister of Petroleum Resources as

well as a provision for assignment/ farm out of rights held under such licenses. The licenses are

exploration licenses, oil prospecting license (OPL) and oil mining lease (OML). Marginal

oilfield became a policy of Government under the Petroleum (Amendment) Decree No 23 of

1996, which introduced paragraph 16A to the 1st schedule to the Petroleum Act. The legislation

provides that the holder of an Oil Mining Lease may with the consent of the Head of State farm-

out any oil Field within its leased area or the Head of State may cause the farmour of a marginal

field that has been left unattended for a period of not less than 10 years from the date of first

discovery. This can hardly be regarded as a definition. Furthermore, there were serious

implications attached to this form of definition - that of the arbitrary classification of fields as

marginal. In order to restrict the arbitrary classification of fields as marginal, the Department of

Petroleum Resources issued guidelines enumerating the features, which must exist before a field

can be classified as marginal. They are as follows:

Low stock tank oil initially in place (STOIIP) and therefore low reserves.

Long distance from existing production facilities, thereby making them uneconomically

viable to put upstream.

Fields with crude characteristics that is different from current streams (such as crude with

very high viscosity and low API gravity) which cannot be produced through conventional

methods.

12
Fields not yet considered for development because of marginal economics under current

market and fiscal conditions.

Field with one or more wells which have not been developed by the operating companies as a

consequence of the company's ranking including unapprised discoveries and undiscovered fields,

but excluding fields with high gas and low oil reserves.

Producing fields, which have become uneconomical when close to or passed abandonment

limits (DPR, 1996).

In addition, the Guidelines for Farm-out and Operation of Marginal Fields was released by the

Office of the Presidential Adviser on Petroleum and Energy in July 2001, which constitute the

protocol for the government regulator, farmuors and farmees in marginal fields operations. The

2001 Guidelines made tacit attempt in streamlining the definition of a Marginal field given the

omnibus provision of the Decree No 23 of 1996. It made more lucid the specific characteristics

of a marginal field and therefore dousing fears of an apparent expropriation powers given to the

Head of State to cause farm-out of any oilfield within the concession of the major oil companies

left unattended for 10 years. Furthermore, it made regulations on the nature of companies that

can participate in the marginal fields. Unlike the 1996 Guidelines released by the DPR that

permits 40% maximum foreign “equity” participation, the 2001 Guidelines does not provide a

ceiling on the extent of foreign investors’ participation. Instead the farmee company is required

to be “substantially Nigerian” and registered solely for exploration and production.

The new guidelines provide that:

Current holders of Oil Prospecting License and Oil Mining Lease (OPL/OML), except

indigenous oil companies are excluded from farming into marginal oil fields. Indigenous

companies must relinquish existing OPL/OML to be eligible.

13
Only companies incorporated in Nigeria that are 51% Nigerian owned are eligible to bid and

applicants should not bid for more than one field.

Marginal fields may only be operated on a “Sole Risk” basis. The agreement shall be for an

initial period of 5 years, renewable thereafter every 5 years until the expiry of the lease.

A marginal field holder may have a foreign technical partner with not more than 40%

(Source: Awotiku ,2011).

The final farms out contracts were not formalized with the majors who operate these fields, by

law, until late 2004. Currently about 31 marginal fields have been awarded to indigenous

marginal field operators and over 60% of these fields are onshore and over 70% of these fields

face funding

challenges and will welcome investment via debt, equity or a combination thereof either

domestic or foreign.

2.3 BASIC ECONOMIC CONCEPTS

Cash flow of a project is the net cash generated or expended on the project as a function of time.

The time value of money is included in economic analyses by applying a discount rate to adjust

the value of money to the value during a base year. Discount rate is the adjustment factor, and

the resulting cash flow is called the discounted cash flow. In this project, four investment

appraisal tools where used for the economic analysis. These include Net present value(NPV),

Internal rate of return(IRR), Profitability index(PI) and Payback period(PBP).

2.3.1 NET PRESENT VALUE

14
Net present value (NPV) of the cash flow is the value of the cash flow at a specified discount

rate. Its obtained as the summation of all the present values of the entire cash flow incurred by

the project. It serves as the measure of project net worth. This is expressed mathematically as;
k cr
NCF t
NPV =∑
cr
t
… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 2.1
t =1 (1+i)

Where;
cr
NPV = Contractor Net Present Value
cr
NCF t = net cashflow at year t

i= interest rate

t = time in years

2.3.2 INTERNAL RATE OF RETURN

The discount rate at which NPV is zero is called the discounted cash flow return on investment

(DCFROI) or Internal rate of return (IRR). Its important investment appraisal tool that measures

the average annual income expected to be generated from the project. It’s given mathematically

as;
k cr
NCF t
IRR=∑ t
=0 … … … … … … … … … … … … … … … … … … … … … … … … … … … … 2.2
t=1 (1+ IRR )

Where; IRR=internal rate of return

2.3.3 PROFITABILITY INDEX

15
Profitability index is used to ascertain the link between benefits and investment cost of a

proposed project. For project with profitability index greater than one indicates that the

investment is profitable while if otherwise the project will lose. It’s given mathematically as;

present values of future cash flows

Profitabillity index= … … … … … … … … … … …..2. 3
Initial investment

2.3.4 PAYBACK PERIOD

This is another investment appraisal technique uses to estimate the period in which the project

will take to recover the initial cash outflow. However, it does not account for the cash flows after

the payback period is reached.

ACF
PBP=Y + LO− … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 2.4
CIF

PBP=Payback period

Y = Number of years preceding, payback year

Lo = Initial year of investment

ACF = Gross accumulate net cash flow for Y

CIF = Net cash flow in year where pay back exactly occur.

2.4 RISK AND UNCERTAINTY

Field development options will inherit different degrees of associated uncertainty and

consequently different degrees of risk. Risk and uncertainty are complementary concepts. Risk

refers to situation where a project has a number of possible alternative outcomes, but the

16
probability of each outcome is known or can be estimated while uncertainty refers to a situation

where these probabilities are not known or cannot be estimated (Awotiku., 2011).

Thus the difference between risk and uncertainty is that under risk, there are assigned

probabilities, and under uncertainty, meaningful assignments of probabilities are not possible. As

with decision making under risk, uncertainty also implies that there may exist no single dominant

strategy, but with the risk and uncertainties quantified and evaluated, a less risky strategy can be

chosen.

Another explanation of risk and uncertainty is given by Graf T., (2005) Uncertainty is the

variability of possible outcomes resulting from the selection of physical parameters, events or

decisions and carrying its own probability. Risk is the potential loss associated with a particular

outcome. It is essentially the impact of the present uncertainty (or uncertainties), either physical

or man-made. In terms of field development, the risk is the probability of having a negative net-

present-value on the project.

Most methods of dealing with risks and uncertainty require assessment of probability of the

uncertain outcomes. Therefore, the success of each method depends upon the accuracy of these

probabilities. Thus, the importance of developing accurate probability estimates is the essential

part of decision analysis. In decision analysis, some tools are used to aid decision making. They

include, Worst Case/Best Case Scenario, Sensitivity Analysis, Expected Net Present Value and

Monte Carlo Simulation. Monte Carlo simulation and Sensitivity analysis will be used in this

project.

2.4.1 MONTE CARLO SIMULATION

A Monte Carlo method is a procedure that involves using random numbers and probability to

solve problems. The term Monte Carlo Method was coined by S. Ulam and Nicholas Metropolis

17
in reference to games of chance, a popular attraction in Monte Carlo, Monaco (Metropolis and

Ulam, 1949).

Monte Carlo simulation, or probability simulation, is a technique used to understand the impact

of risk and uncertainty in project management, cost, and other forecasting models. Monte Carlo

simulation has been widely used in the petroleum industry for various purposes as explain in

Chapter One of this project.

The Monte Carlo simulation starts with a mathematical model (or sets of equations) in which a

dependent variable (output) is a function of the independent variables (input). The dependent

variable usually is the quantity of interest. The different input variables might have different

statistical distributions – normal, log normal, uniform, etc. or they might have different

parameters even though they are the same kind of distribution. For example, two uniform

distributions can have different parameters: minimum and maximum. Depending on specific

statistical distributions, many random variables are generated for each input variable after

building the mathematical model. Probability density functions are used to generate random

numbers for input variables. Thus, those probability density functions have to be determined

before Monte Carlo method can be applied.

Statistical distributions are characterized by different numbers of parameters. A normal

distribution has two character parameters: mean and standard deviation. A triangular distribution

has three parameters: minimum, most probable, and maximum. A random number of each input

variable is plugged into the mathematical model, and an output variable is calculated. Thus,

many values of the output variable are obtained by using those values of the input variables.

Choosing distributions and their character parameters is vital to the successful application of

Monte Carlo simulation. Direction for selecting input parameter distributions can be obtained

18
from three sources: fundamental principles, expert opinion, and historical data. According to

statistical principles, products of variables tend to have lognormal distributions while sums of

variables tend to have normal distributions.

The Monte Carlo simulation is most times computationally intensive. If many input variables are

random and they all have large variabilities, a larger number of runs of the mathematical model

may be needed to recognize the range of the dependent variable response. An important point

about the Monte Carlo method is that the output variable distribution is linked to the input

parameter distributions ( Guohong, 2003).

Like any other method, the Monte Carlo method has some advantages and disadvantages. The

results contain more information about possible outcomes than the deterministic and scenario

approach. Instead of discrete points as from the deterministic or scenario approach, Monte Carlo

results are continuous distributions such as probability density and cumulative distribution

functions. Also, the Monte Carlo results give the users ideas about the probability of the most

likely outcome, the pessimistic outcome, and the optimistic outcome.

2.4.2 SENSITIVITY ANALYSIS

Sensitivity analysis allows a user to study the effect of changes in input variables on output

variables. The simplest type of sensitivity analysis is to simply vary one of the input parameter in

the mathematical model by a given amount, and examine the impact that the change has on the

model’s results, i.e. the output. This is known as one-way sensitivity analysis, since only one

parameter is changed at one time. For example, sensitivity analysis can be used to investigate

what happens to the NPV and IRR of a project when one or more input variables change. The

idea is that all the variables are kept constant except the one(s) analyzed and we check how

19
sensitive the NPV or the IRR are to changes in that variable. Sensitivity analysis tools include

tornado diagrams, spider diagrams, sensitivity or value measured diagrams.

A tornado diagram is used to simultaneously compare one-way sensitivity analysis for many

input variables and a single output variable. For example, effect of change in reservoir

parameters on reserves can be studied using tornado diagram. For every reservoir parameter that

affects the final reserves, geoscientists and engineers work together to determine the most-likely,

pessimistic, and optimistic values. The most-likely, pessimistic, and optimistic reserves values

are then calculated with the corresponding reservoir parameter value. For example, for reservoir

porosity, the optimistic reserve is calculated with the optimistic porosity value; the most likely

reserves is calculated with the most likely porosity value; the pessimistic reserves value is

calculated with the pessimistic value. Finally, a reserves range is obtained from the pessimistic

and optimistic reserves values.

2.5 LITERATURE GAP

Most of the research on marginal field development focuses on using one or two appraisal tools

mostly relying on NPV, in this research four appraisal tools will be use to evaluate the viability

of the project. Also due to high level of decline in oil price some of the research that where

done on marginal field development need update to reflect current status of oil price in the

international market.

20
21
 CHAPTER THREE
3.0 METHODOLOGY

3.1 INTRODUCTION

Economic analysis using discounted cash flow modelling (DCM), Net present Value, Internal rate

of return, Profitability Index and Payback period were used to evaluate the economic viability

for developing the field. Evaluation using those techniques elicits the economic performance

indicators in a fashion that deciding whether to proceed or wait is made much easier. The

methodology used in this research has four main sections as shown in figure 3.1 below.

Fig 3. 1 :various sections in the Methodology

22
 3.2 CASH FLOW MODELLING

The cash-flow model was built using Microsoft Office Excel. The goal is to obtain the NPV, PI

Payback Period and IRR for the development of Amoji field. The cash flow of the development

is simply the cash expanded over a defined period. The process of obtaining the cash flow starts

with obtaining a production profile. From this, the revenue generated yearly is obtained and the

cash spent yearly is also obtained. The cash received less cash spent is the Net Cash Flow.

3.2.1 PRODUCTION PROFILE

The production profile was developed using exponential decline curve equation. Beginning with

one-year production data obtained from the field. The rate of production(BOPD) and annual

production for the subsequent years were obtained by using production decline rate of 10%. The

exponential decline curve equation was used. The exponential decline is also called the constant

percentage decline or constant fraction decline. The rate at time t is determined from the

−t
equation; q t=qi e … … … … … … … … … … … … … … … … … … … … … … … … … … … … .3.1

q t = rate of production at any time t

q i= initial rate of production

t = time period between qi and qt, years

d= nominal decline rate, fraction per year, taking at 10% in this research

3.2.2 CASH FLOW ANALYSIS

23
The marginal field policy in Nigeria is governed by the 2005 Marginal Field Fiscal Policy and

this operates as a PSC with its own special terms different from what is obtained in other types of

contract in Nigeria. The major components PSC that forms the basis for the marginal field cash

flow analysis are shown in the figure 3.2 below;

Fig 3. 2 : Major components of Production Sharing contract

3.2.3 GROSS REVENUE

This is the amount of income generated per year on the sales of crude oil by the marginal

operator. It is given as;

Gross revenue per year =Annual production × Oil price……………………….………...…….3.2

24
3.2.4 ROYALTY

Royalty payment is the amounts paid to the owner of a resource as compensation for the

exploitation of a non-renewable and irreplaceable resource. Traditionally they are based on

volume and not on profitability. The level of production is the only parameter in volume based

royalty schemes; the costs of production and prevailing oil prices play no part. Thus, royalty

payments for a high cost field will be the same as for a low cost one of the production levels are

the same. Therefore, in a conventional royalty scheme the percentage paid as royalty goes up

when prices are low. In Oil and Gas production is a percentage of gross revenue generated from

the sale of hydrocarbons and it can be paid in cash or kind. In marginal field policy, royalty is

paid as royalty oil in cash.

The royalty is paid to the Federal Government of Nigeria. This is paid directly to the government

as oil and gas is produced and sold irrespective of the level of profit or loss from the field. It is a

front loaded government take. Table 3.2 below lists the sliding scale royalty rate payment to the

government.

Table 1:Sliding scale royalty rate to state (Awotiku, 2011)

Daily Production ,bbl/day Rate

From To %

0 5000 2.5

5000 10000 7.5

10000 15000 12.5

15000 25000 18.5

25000 No limit unless neotiated 18.5

25
In this Reseach 2.5% royalty was used as the production range from 0 to 5000 B0PD.

3.2.5 COSTS (Capex and Opex)

The two major costs associated with developing any type of oil fields are the Capital

Expenditures (Capex) and Operating Expenditure (Opex).

CAPEX

These are capital intensive investments which are needed to exploit and produce oil. CAPEX

spent in developing marginal fields include geological and geophysical (G&G) costs,

exploratory, appraisal, and development (infill) drilling costs, side tracking, workovers,

surface/processing facilities, pipeline laying, preventive maintenance of production facilities and

infrastructures, etc. The Capex for the various terrains of marginal fields differ. For example, the

cost of drilling in a marginal onshore field is different from the cost of drilling in an offshore

marginal field.

In this project the breakdown for the capex used is shown in Table 3.1 below.

Table 2:Capex breakdown for onshore marginal field

CAPEX Cost,MM$/Year

Signature bonus 0.5

G&G Activities 2.5

Exploration/ Apraisal Drilling 5.0

Development well Driling 15

Flowlines and jacket 6.5

Surface facilities 5.5

Workovers 3.0

Total 38

26
To recover CAPEX Reducing balance method was used in this work in which annual depreciation

charge is given by;

ADC T =10 % NBV T −1 … … … … … … … … … … … . … … … … … … … … … … … … … … … … … … … .3.2

where ;

ADC T = Annual depreciation charge

NBV T −1=Netbook value in the year preceding the accountingt year

OPEX

This is operating expenditure and refers to the money required to operate and maintain the

facilities, to lift the oil and gas to the surface; and to gather, treat and transport hydrocarbons.

These costs are usually direct costs that are spent to run the operational activities of marginal

fields which include production, processing and transportation cost. General and administrative

cost is also an operating expenditure. Usually overheads take a huge chunk of OPEX. OPEX can

either be fixed or variable cost. In this work variable cost of 4 dollars per barrel was used for

OPEX.

3.2.6 COST RECOVERY

This is a way an investor or contractor can recover cost that was used to develop the field.

Investors cost (CAPEX plus OPEX) known as petroleum costs are recovered from cost oil

portion of revenue less royalty. Unrecovered costs are carried forward and recovered in

succeeding years. After recovering cost, the portion of cost oil left is called the excess cost and

this is split between the contractor and the government in the same way profit oil is split.
27
To recover CAPEX Reducing balance method was used in this work in which annual depreciation

charge is given by;

ADC T =10 % NBV T −1 … … … … … … … … … … … . … … … … … … … … … … … … … … … … … … … .3.3

where ;

ADC T = Annual depreciation charge

NBV T −1=Netbook value in the year preceding the accountingt year

CR T =ADC T +OPEX T … … … … … … … … … … … … … … … … … … … … … … … … … … … … … ..3. 4

CR T = cost recovery in year t,

OPEX T =operating expenditure in year t,

3.2.7 PROFIT OIL

Revenue remaining after removing royalty oil and cost oil from the gross revenue is shared

between the contractor and the government. What is shared is known as the profit oil which

includes the excess cost remaining after cost recovery. The profit oil is given by;

PROT =GR T −RY T −CR T … … … … … … … … … … … … … … … … … … … … … … … … … … … … 3.5

Where;

PROT = Profit Oil in Year t

GR T = Gross Revenue in Year t

RY T =Royalty in Year t

CR T =Cost Recovered in Year t

The profit is shared between government and the contractor based on recovery factor

Profit oil+cost oil

Recovery Factor= … … … … … … .3 .6
Cumulative Capital+Cumulative non Capital Cost

Capital costs are the CAPEX while non – capital costs are the OPEX

28
Table 3.3 : Profit Sharing Based on Recovery factor(source: Awotiku,2011)

The recovery factor in this research was found to be 1.7 and Contractor share was found to be

53% and Government share was found to be 47%.

CSPOT T =PRO T −47 % PRO T … … … … … … … … … … … … … … … … … .. … … … … … … … … … 3.7

GSPOT T =47%

PROT … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … …..3. 8

Where;

CSPOT T = Contractor Share of Profit oil at year t

GSPOT T = Government Share of Profit Oil at year t

3.2.7 TAXES
All taxes are deducted from contractor share of profit oil,which include;

NDDC Charge

The Niger Delta Development Commission (NDDC) is the corporation established to formulate

Policies & Guidelines, and to develop and implement projects and programs for the

development of the Niger-Delta area – the area most of Nigeria’s crude oil is produced from.

NDDC charge is 2.5 %.

VALUE ADDED TAX (VAT)

VAT is generally applicable to oil and gas operations at a flat rate of 5%. VAT is paid on

29
total capital plus operating cost.

EDUCATION TAX

This is two percent (2%) of accessible profit.

PETROLEUM PROFIT TAX (PPT)

This is a type of income tax and it is imposed on marginal field development by the Federal

government of Nigeria. PPT for marginal field is 55% of the PPT taxable base.

TOTAL TAXES = NDDC TAX +VAT + EDU TAX +PPT………………………….…………

3.9
cr
NCF t t=CSPOT T -TOTAL TAXES……………………………………….…….…………,,….3.10

cr
NCF t = Net cash flow to the Contractor at year t

CSPOT T = Contractor Share of Profit oil at year t

k cr
NCF t
NPV =∑
cr
t
… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 3.11
t =1 (1+i)
cr
NPV = Contractor Net Present Value

NCF t = net cash flow to the contractor

i = interest rate

t = time in years

3.3 MONTE CARLO SIMULATION

The NPV, PI, IRR &PAYBACK PERIOD computed in the model above are all deterministic. To

obtain their probabilistic values, Monte Carlo simulation was done. The simulation allows for the

description of the risk and the uncertainty of variables that influence the probability of the

project by probability distributions. For the model developed, the uncertain variables that

30
introduce risk in Computation of the outputs are, oil price, production rate, Petroleum Profit Tax

(PPT), Royalty, CAPEX, and variable OPEX. Palisade Software was used for the Monte Carlo

simulation.

3.3.1 DEFINING INPUT TO THE SOFTWARE

First step is to define the assumptions or distributions. The independent variables and their

assumed probability distributions are defined as follows in figure 3.7 below:

Fig 3. 3: defining input

3.3.2 DEFINING THE OUTPUT

After defining the independent variables as above, the dependent variable is then defined. (NPV,
PI, IRR or PAYBACK PERIOD) is the dependent variable.

31
Fig 3. 4:Defining output

3.3.3 RUNNING THE SIMULATION

A Monte Carlo Simulation with 1000 trials is then run with the percentile computed as

probability above a value. The simulation then generates the probabilistic estimates of the output.

Sensitivity analysis is done using Tornado and Spider diagrams to determine the influence of the

input variables on the model output.

32
 CHAPTER FOUR

4.0 RESULTS AND DISCUSSION

4.1 INTRODUCTION

This chapter presents the results of Deterministic and Probabilistic risk assessment of developing

Amoji field in Delta State and incorporate the study of risk associated with developing Nigerian

marginal fields in general. The result of the base case – deterministic (NPV, IRR, PI, PAYBACK

PERIOD) model for the field development were shown and the results of the Probabilistic output

of the model obtained by running Monte-Carlo simulation were also given. The result of

qualitative risk assessment ranks the risk in terms of their impact on the field development. The

result of the sensitivity analysis carried out on the model outputs (NPV, PI, IRR & PAYACK

PERIOD) were shown and the result were subsequently analyzed. The overall result gives the

high risk variables that should be properly understood to prevent huge loss when the field is

developed.

4.2 MODEL OUTPUTS

In this Analysis, deterministic inputs of oil price, production rate, fiscal terms, drilling and

exploration expenses(CAPEX) and operating expenses(OPEX) were used to determine the

outputs of the model (NPV, PI, IRR, PAYBACK, PERIOD) of the field development.

33
 Fig 4. 5: Developed model of Amoji field

Fig 4.2: uncertain inputs and outputs of the Developed model

A total of 10 years was assumed as life of the field and production did not begin until one year

after investment began. The payback time or pay out period gives an indication of how long it

will take to recover the investments. In simple terms, the payback time used for this work is the

time when the undiscounted cumulative cash flow turns positive. The payback time for the

venture was found to be four and half years.

The NPV provides an evaluation of the field development’s net worth to the investor in nominal

terms. A hurdle rate of 10% was used to compute NPV. This rate assumes that the marginal

field investors get adequate support from the government and banking industry to borrow

34
money at this rate to enhance the quick development of the marginal fields. The NPV of the

investment was found to be positive indicating that the investment is profitable for the marginal

field investor.

The Internal rate of return (IRR) is the average annual income expected to produce by the

project. This was found to be negative which is not encouraging.

Profitability index is the measure of the benefit in relation to investment. If PI is lessthan one the
project will lose but in case where PI is greater than one, is indicating that the project is
acceptable. For this Project, the profitability index was found to be 3.09 which is by far greater
than one.

4.3 PROBABLISTIC EVALUATION

To estimate the profitability of developing Amoji field in Delta state. This was achieved

probabilistically as follows;

The probabilistic evaluation involved stochastic assessment for each outputs of the model by

running Monte Carlo simulation. The input parameters used are, Oil Price, Production rate,

Royalty, Petroleum Profit Tax, CAPEX and Variable OPEX. The normal distribution was

assumed as the probability distribution of the input parameters while triangular distribution was

used for the outputs (NPV, PI, IRR&PAYBACK PERIOD). The simulation was run for 1000

trials to all the outputs of the model. The probability was computed as the probability that it is

above or below that value.

35
 1
0
Values x 10^-8

40
NPV / 2015
30.1 67.3

30
5.0% 90.0% 5.0%
4.0

3.5

20
3.0
NPV / 2015
2.5

2.0
@RISK Trial Version Minimum5,773,309.12
Maximum94,792,274.46
For Evaluation Purposes Only Mean 48,359,625.62

10
Std Dev11,525,031.60
1.5
Values 1000

1.0

0.5

0.0 0

Values in Millions
-10

Fig 4. 5 : probability chart for NPV

-20

Based on the result presented by probability chart for NPV,it shows that in the worse scenarior

the project will result to NPV of $5,773,309milllion,in the most probable event the resulting
-30

NPV is $48,359,625MM while in the best scenarior the project will worth $94,792,274
-40

miliion,meaning in all the three cases developing the field is profitable.

PROFITABILITY INDEX / 2015

-14.5 18.3
5.0% 90.0% 5.0%
0.040

0.035

0.030
PROFITABILITY INDEX / 2015
0.025

0.020
@RISK Trial Version Minimum
Maximum
-31.234
33.638
For Evaluation Purposes Only Mean 1.944
0.015 Std Dev 9.996
Values 1000

0.010

0.005

0.000

Fig. 4. 5 : probability chart for profitability index

The result of probability chart for PI , predict that in the worse scenarior the project will result

to PI of -14.5,in the best scenariou it amount to 18.3 while in the most likely event it result to

[Link] means for every dollar spend in the project there’s expectation of having about two

36
 -2
-25%
dollars in [Link] further comfirm that develoing the frield will be profiatable.

-30%
IRR / 2015
-11.66% 7.37%
5.0% 90.0% 5.0%
8

6
IRR / 2015
5
Minimum -25.414%

4
@RISK Trial Version Maximum 14.496%
Mean -1.350%
For Evaluation Purposes Only Std Dev 5.853%
3 Values 999 / 1000
Errors 1
2

Fig 4.5: probability chart for IRR

Fig. 4. 5 : probability chart for IRR

For IRR, probability chart shows that in the worse scenarior the project will result to IRR of

-11.66% ,in the best scenarior the project will have IRR of 7.37%,while in the most like event the

IRR will be -1.305% indicating thre’s still risk in the project

4.4 SENSITIVITY ANALYSIS OF MODEL OUTPUTS

To critically, evaluate the opportunities and the impact of uncertainties through single point

sensitivity analysis. The sensitivity analysis was carried out by using spider charts and tornado

diagrams in PALISADE software.

37
 70%
60%
50%
IRR / 2015
Inputs Ranked By Effect on Output Mean

70
20% 60 30% 65 40%
Oil Price ($) / PARTICULARS -11.837% 7.2711%

CAPEX ($) / 2015 -4.0435% 1.5381%

Input High
Average Operating cost per barrel / PARTICULARS
@RISK Trial Version
-2.5331% 0.56880%

ROYALTY @ (2.5%) ($) / 2015 For Evaluation

-2.3539% Purposes
-0.27468%Only Input Low

55
IRR / 2015 -2.3244% -0.37568%

Annual production rate / PARTICULARS -1.8295% -0.94919%

10%
Baseline = -1.350%

50
45
0%
IRR / 2015
IRR / 2015

40
Fig. 4. 5 : tornado chart for IRR
35

IRR / 2015
Change in Output Mean Across Range of Input Values
30

8%
6%
Oil Price ($) / PARTICULARS
4%
25

2% CAPEX ($) / 2015

0% Average Operating cost per barrel / PARTICULAR
-2%
@RISK Trial Version
-4%
For Evaluation Purposes Only
ROYALTY @ (2.5%) ($) / 2015
-6%
-8%
IRR / 2015
-10%
-12%

Input Percentile%
Fig
Fig .4.7: spider chart for IRR

NPV / 2015
Inputs Ranked By Effect on Output Mean

Oil Price ($) / PARTICULARS 28,648,153.12 67,986,977.79

CAPEX ($) / 2015 43,144,048.86 52,524,710.00

Average Operating cost per barrel / PARTICULARS 45,201,321.05 Input High

@RISK Trial 50,325,668.83
Version
Annual production rate / PARTICULARS For Evaluation
46,310,920.50 Purposes Only
50,153,738.34
Input Low

NPV / 2015 46,654,609.01 49,861,511.57

ROYALTY @ (2.5%) ($) / 2015 47,276,647.30 50,458,479.71

Baseline = 48,349,860.39

Values in Millions

Fig 4.8: tornado chart for NPV

38
 10
Values in Millions

15
0%
NPV / 2015

10
5
NPV / 2015
Change in Output Mean Across Range of Input Values

0
70

65 Oil Price ($) / PARTICULARS

-5
60
CAPEX ($) / 2015
55

-10
Average Operating cost per barrel / PARTICULARS
50 @RISK Trial Version

-15
45 For Evaluation Purposes Only
40 Annual production rate / PARTICULARS

35
NPV / 2015
30

25

Input Percentile%

Fig 4. 5 : spider chart for NPV

PROFITABILITY INDEX / 2015

Inputs Ranked By Effect on Output Mean

PROFITABILITY INDEX / 2015 -14.391 20.653

CAPEX ($) / 2015 1.3426 5.2696

ROYALTY @ (2.5%) ($) / 2015 1.8903 4.6486 Input High

@RISK Trial Version
Annual production rate / PARTICULARS For Evaluation
2.0511 Purposes Only
4.6855
Input Low

Oil Price ($) / PARTICULARS 1.5155 3.9417

Average Operating cost per barrel / PARTICULARS 2.3568 3.9780

Baseline = 3.093

PROFITABILITY INDEX / 2015

Fig 4.10: tornado chart for profitability index

39
 80%
70%
60%
PAY BACK PERIOD / 2015

50%
Inputs Ranked By Effect on Output Mean

PAY BACK PERIOD / 2015 3.6486 5.4621

40%
Oil Price ($) / PARTICULARS 4.0751 4.8952

CAPEX ($) / 2015 Input High

@RISK
4.4201
Trial4.6382
Version

30%
Annual production rate / PARTICULARS For Evaluation
4.4412 Purposes
4.6540 Only Input Low

Average Operating cost per barrel / PARTICULARS 4.4552 4.6466

20%
ROYALTY @ (2.5%) ($) / 2015 4.4418 4.5730
Baseline = 4.5289
10%

PAY BACK PERIOD / 2015

0%

Fig 4. 5:tornado chart for payback period

PAY BACK PERIOD / 2015

Change in Output Mean Across Range of Input Values
7.2
PAY BACK PERIOD / 2015
7.0
6.8
Oil Price ($) / PARTICULARS
6.6
6.4 Average Operating cost per barrel / PAR
6.2
@RISK Trial Version
6.0
For Evaluation Purposes Only
ROYALTY @ (2.5%) ($) / 2015
5.8
5.6
Annual production rate / PARTICULARS
5.4
5.2

Input Percentile%

Fig 4. 5 : spider chart for payback period

4.5 DISCUSSION OF RESULT

The result of sensitivity from highest to lowest are Oil Price, Average operating cost, CAPEX,

Royalty, and Annual production rate, for IRR. In case of NPV, are Oil Price, Capex, Average

operating cost, Annual production rate and Royalty. For PI shows Capex, Royalty, Annual

production rate, oil price, and Average operating cost. While for payback period result predict

Oil Price, Capex, Annual production rate, Average operating cost, and Royalty. So in all the

40
cases oil rice have highest impact followed by either Capex or Opex and spider chart shows that

increase in oil price increases the net present value, PI & IRR while for capex and opex the

reverse is the case.

41
 CHAPTER FIVE
5.0 CONCLUSION AND RECOMMENDATION

5.1 CONCLUSION

Prior to the development of any oil and gas field, its mandatory open the field operator(s) to

evaluate the viability of the project. Thus, to achieve this several steps were normally followed

which include generating production forecast, Obtaining/determination of the relevant cost

forecast (Capex and Opex), modeling of the fiscal system (tax laws and/or contract terms that

govern the methods by which oil and gas companies pays a portion of their proceeds to various

government agencies), determination of relevant economic indicators, Monte Carlo simulation

and sensitivity analysis of technical parameters. At the end of this project, the project was able to

evaluate the viability of developing Amoji field in Delta state and conclusion was derived based

on the analysis of result obtained.

In conclusion, sensitivity analysis result shows that oil price, Capex and Opex has the highest

impact on marginal field development. A decrease in oil price will sharply affect the NPV of the

project. As of date, oil price is favorable for marginal field development and should be closely

monitored. Profitability index, and net present value favor development of the field with 90%

confidence level of high project net worth. It was then concluded that developing Amoji field is

indeed profitable with a payout period of four and half years. However, the IRR was low

showing that there’s still risk in the project.

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 5.2 RECOMMENDATIONS

 Amoji field is marginal and the fiscal terms of developing marginal fields remain

unchanged since 2005; marginal field operators should push for a decrease in Petroleum

Profit Tax and push for quick passage of the petroleum industry bill (PIB). A decrease in

the Petroleum Profit Tax will increase investor’s take and project profitability; thereby

creating a favorable climate for marginal field development.

 Appropriate action should be taken in response to the risks identified in order to reduce

the overall risk exposure when developing marginal fields. When companies observe that

they are running out of cost, if its due to high opex they can reduce their man power

while in case of volatility in oil price it’s advisable to undergo hedging.

 The major associated risks with highest impact should be constantly monitored and

reviewed to ensure that changes are captured as they occur. This then will help in

providing guidelines for mitigation measures to reduce the impact of the risk and ensure

successful marginal field development.

 Government through Central Bank of Nigeria should encourage the commercial banks to

give credit and financial support to the indigenous oil and gas firms.

 Nigerian Government should periodically re-assess the impact of her petroleum fiscal

system and adjust the relevant parameters involve so that the fiscal regime application

to future marginal oil field projects reflects changes in market conditions, government

policy and geological risks to ensure efficient use of resources

 Oil and gas companies should be doing periodic review of projects to forecast any

potential risk that might occur

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